Inside the bankruptcy of Arkansas coach John L. Smith

Smith and five other investors joined to launch a number of real estate investments near Louisville. But when the economy soured and the loans came due, Smith said he could not pay his share.

Arkansas coach John L. Smith, pictured here talking to reporters in April, filed Chapter 7 bankruptcy in September, six years after he and a group of co-investors in Louisville launched several real estate investments that ultimately failed to pay off.
(Photo: Gareth Patterson, AP)

Story Highlights

Kentucky judge rejects Smith's argument that he had different understanding of the deal

Group of Louisville investors sought to build upscale subdivision with homes priced at $1 million

In lawsuits, Smith is accused of walking away from business partners and his obligatitons

LOUISVILLE, Ky. -- In the months before he filed for bankruptcy, Arkansas football coach John L. Smith was chastised by a Kentucky judge who questioned his judgment after he walked away from his financial obligations and argued he did not understand the terms of a real estate venture he'd joined with five other investors.

Smith, who amended his bankruptcy filing Wednesday to increase his total liabilities to $40 million, was sued last year to force him to pay his share of debt stemming from real estate investments the group launched in 2006. While other investors tried to keep up with the debt payments and await a rebound in the market, Smith claimed he was being unfairly punished because he no longer could make the "substantial" payments required of him, court records show.

"Smith was not duped into signing the notes, but instead had sufficient time to read the agreements, ask questions and/or seek legal counsel regarding the documents' terms," Eckerle wrote in her February ruling against Smith.

"Smith is a sophisticated businessman capable of understanding terms and entering into legally binding contracts. Having failed to either read or comprehend the significance of the ... provisions, he may not now assert that he was fraudulently induced to sign."

Eckerle's $865,000 judgment against Smith was just the start. He faced several related lawsuits and owed money to a long list of banks and creditors, leading him to seek Chapter 7 bankruptcy protection Sept. 6. Many of the liabilities he lists were shared by five other co-debtors from Louisville, where Smith was head coach from 1998 to 2002.

Canfield told USA TODAY Sports that Smith "left us holding the bag on a lot of things" but says he was advised by his attorney to not make further comment on the case. The other investors, including Smith, did not return calls seeking comment.

Arkansas referred questions for Smith to his attorney, who did not return calls.

USA TODAY Sports reviewed hundreds of pages of court documents related to Smith's real estate investments and bankruptcy filing. They detail how the deals started, what went wrong and the massive financial pressure on Smith, who must deal with the bankruptcy as he tries to turn around a Razorbacks team that stands at 1-4 after opening the season as a national championship contender.

The irony is that Smith was hired as an interim coach to calm the turmoil caused by former coach Bobby Petrino, who was fired after his boss said Petrino misled the university about a motorcycle crash involving Petrino and a school employee with whom the coach was having an extramarital affair.

Arkansas travels to Auburn on Saturday and plays Kentucky at home a week later. Sandwiched between, on the day before the Wildcats hit Fayetteville, is Smith's date in bankruptcy court to face his creditors.

The big plan

Canfield owns Canfield Development Co., which specializes in the development of upscale single-family homes and subdivisions. Around 2006, as real estate values were soaring, he approached Smith and the other investors to join him in various ventures.

According to court records, Canfield, Smith and the others formed limited liability companies that owned several residential developments in the Louisville area. Two of the companies, Terra Acquisitions and Terra Acquisitions II, were to "acquire, own, develop, market and sell real property."

Canfield held a 50% interest in the companies and managed them. The five others, including Smith, each had 10% stakes.

In one series of transactions, the group took out loans to purchase and develop rural property in Goshen, Ky. They borrowed $4.5 million in 2006 and $3 million in 2008.

The group bet big on a subdivision named Poplar Woods, envisioned as 93 large residential lots on 200 acres, located amid wooded countryside and horse farms about 15 miles outside Louisville. Home prices were expected to be about $1 million.

It did not take off. About 20 homes have been built there since 2008, and the property is dotted with signs that say, "New Price," "Built to Suit" and "Lot for Sale."

"People move into that part of Oldham County for the schools there," says Cathy Miller, a Louisville real estate agent. "That's why I moved out there. It's a nice area. It's also a matter of marketing. Unless you drive out there, you don't know it's there. It's a good idea. Just maybe the timing isn't right."

Shortly after the development started in 2008, the real estate market cratered along with the rest of the economy. As property values plummeted, the group struggled to come up with enough money to pay its loans, much less get a return on its investment.

Canfield made "numerous and substantial" requests for capital from the other investors, with Smith claiming he paid more than $250,000, court records show.

The company that purchased the Goshen property — Terra Acquisitions II — still defaulted on the 2006 and 2008 notes. To prevent the notes from being sold to a third party, the bank approached Canfield and Rhodes about purchasing them at a discount. Rhodes agreed, helping form Terra Springs LLC to acquire the two notes.

The idea was to "allow for more time for the Terra Acquisitions II members to be able to repay the loans, which also benefited Smith at the time," court records state.

In effect, Rhodes was helping to form a new company (Terra Springs) to buy the loans owed by his other company (Terra Acquisitions II), which included Smith. The move might have bought the investors some time, but Smith said he was no longer able to make payments regardless.

"Smith has been unresponsive to pre-litigation pleas by (Terra Springs) to at least pay a portion of the debt," a court filing claimed.

Terra Springs sued Smith for payment in December, 2011, noting in a court filing that while other investors "have continued to perform their duties under the LLC agreement and have been cooperative in assisting the LLC in paying off its debts, without resorting to litigation, Smith has failed to contribute to the LLC since 2010."

The $865,000 judgment against Smith this year stemmed from another suit brought by Rhodes, who sued him in 2010 to collect on loans.

In his bankruptcy filing, Smith's list of liabilities include that judgment and a $20 million claim by Terra Springs. Smith is disputing most of his debt claims.

The road ahead

By declaring Chapter 7 bankruptcy, Smith seeks to discharge his debts and start over. The lawsuits against him are automatically stayed, according to law.

But as a result of his bankruptcy, Smith will have trouble borrowing money in the future and must make detailed disclosures about his finances.

"The bottom line is that bankruptcy is not fun and packs a whopping credit punch," said Scott Ehrlich, a professor at California Western School of Law.

Smith's case is unusual, as Ehrlich noted that more than 90% of Chapter 7 debtors are low earners who have excessive debt. At Louisville, Smith earned $800,000 a season. At Michigan State, where Smith was head coach from 2003 to 2006, he earned more than $1.3 million a season. At Arkansas, he made more than $200,000 a year as an assistant coach since 2009 before getting a 10-month contract this year to be head coach for $850,000.

Smith says most of his assets are tied up in retirement accounts and that he has $2,000 of real property.

Along with the subdivision, Smith lists several other investments that struggled. His bankruptcy filing says he owes at least $200,000 to Juneja, the anesthesiologist and co-investor.

Of the six investors involved in Terra Acquisitions II, records show Smith and another investor filed for bankruptcy: Mason, the banker who last year claimed $22 million in liabilities against $1 million in assets.

For the other investors, the market might be slowly reviving itself. At Poplar Woods, a new home was under construction recently with contractors' trucks parked in the driveway. Homes are being advertised from $650,000.

"I do sense the market is coming back," said Pat Durham, a builder who owns property at Poplar Woods. "I've gotten more calls in the last month and a half than I've gotten in the last three years."

It's still slow, though. Miller, the real estate agent, is trying to sell a Poplar Woods lot that foreclosed. The bank recently reduced the price from $125,000 to $99,000.